The Relationship Between Entrepreneurship, Innovation and Economic Development

Last Updated: 17 Aug 2022
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Entrepreneurship firstly arise from Richard Cantillon’s Essai sur la Nature du Commerce en Général, originally refers to the behavior people aim to become an entrepreneur. Currently, it is an increasingly heated issue worldwide because its power on driving innovation, productivity, job creation and economic development (Fisher, 2010). Schumpeter (1934) defined entrepreneurship as a creative response to potential opportunity and innovation means creating something original, innovative and significant that makes difference in a market or society (Frankelius, 2009).

With respect to the relationship between entrepreneurship, innovation and economic development, Schumpeter (1934) highlights the role of entrepreneurship is the catalyst of economic development through innovation. However, recent research discovered that the level of economic development, in turn, has significant influence on entrepreneurship and innovation. Hence, in my opinion, entrepreneurship has important positive effects on economic development in terms of innovation, whereas economic development also affects entrepreneurship and innovation.

At the same time, sustainability, which is always combined with entrepreneurship, innovation and economic development frequently arises in government policies or academic research, is another popular topic now. This essay will elaborate the relationship between entrepreneurship, innovation and economic development respectively with theoretic literature and business cases in section 2, and then in section 3, the role of sustainability in this relationship will be illustrated.

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2. The relationship between entrepreneurship, innovation and economic development.

2.1 Entrepreneurship and innovation
Numerous theses are put forth to clarify the relationship between entrepreneurship and innovation. Shane (2003) claims that the primary issue for an entrepreneur is create new ventures while innovation is a secondary consideration. Hindle (2009) also views innovation as an entrepreneurial process to generate economic benefits. Both these two views reflect that entrepreneurship is the centre of the relationship and the role of innovation is limited.

However, Drucker (1985 cited in Lumsdaine and Binks, 2007) points out a more reasonable relationship between innovation and entrepreneurship that innovation is a specific and unique tool of entrepreneurs. Schumpeter, as cited in Westhead, Wright and McElwee 2011, also explicitly concludes that innovation is a pre-requisite for genuine entrepreneurship. These two points clarify that individuals who can become entrepreneurs have the capacity to combine creative ideas in novel way and create something original, initiative and significant. Thus, in this way, innovation is a must for entrepreneurship. A suitable example of this is non-bag vacuum cleaner designed by James Dyson.

Noticing a phenomenon that when the bag of vacuum is full, the suction became inefficient, Dyson devised the idea of producing a non-bag vacuum cleaner that promotes efficiency and convenience. He put this innovative idea into effect, established new business and launched the product in 1993, and eventually his product dominated the British vacuum cleaner market (Westhead, Wright and McElwee, 2011).

In this example, it is evident innovative non-bag vacuum cleaner will not be obtainable in absence of innovation. In addition, Schumpeter (1936 cited in Lumsdaine and Binks, 2007) also emphasizes the issue that an entrepreneur cannot combine existed products and create new industry without innovation. For these reasons, innovation is the premise of entrepreneurship.

2.2 Entrepreneurship and economic development.
In current several decades, theoretical literature and empirical evidence have been put forth to illustrate the relationship between entrepreneurship and economic development. Among these various theories, the role of entrepreneurship is to recognize opportunities, ensure resources efficiently and eventually enhance economic development (Casson, 1982) has been widely accepted. Recent research conducted by Audretsch and Keilbach (2004) demonstrates the vital factor accounting for the GDP variations between the former Soviet Union (USSR) and the USA.

Even though these two countries have similar technological sophistication, USSR’s economic development significantly lagged behind the USA. With further research into it, they discover that the USA has a large number of entrepreneurs but it is not the same to USSR. This example highlights that negative effects on economic development in absence of entrepreneurs. Furthermore, Organization for Economic Co-operation and Development (1998) points out that a country that has a large number of entrepreneurial activities is likely to constantly acquire original or advanced goods and experience considerable economic benefits. For these reasons, it is clear that entrepreneurship stimulates economic development.

However, contemporary research highlights the point that the level of economic development also influences entrepreneurship. That is the popularity of entrepreneurship varies at different economic development stages. First, in the early economic development stage, there is a negative correlation between economic development and entrepreneurship. Schuultz (1990) and Yamada (1996) based on their research proved that low level of economic development usually results low self-employment rate.

This probably because manufacturing industry which takes advantage of economies of scale, standardization and massive production dominates the market and the cost for individuals to establish a new business is unaffordable. In addition, the will of individuals to take risk to be an entrepreneur is reduced because of the improvement of secured income (Iyigun and Owen, 1998). In other words, few people take entrepreneurship during this period. Nevertheless, with the further development of economies, service industry which needs little capital to start-up gradually takes the place of manufacturing industry and becomes the key component to boost economies and dominates the market, providing more opportunities to entrepreneurs.

Simultaneously, advanced information and communication technologies and further process of globalization increased the economic uncertainties in turn offer an area for new enterprises founded (Acs, Audretsch and Evans, 1994) such as a large number of SMEs in IT industry arise and grow in a high speed. As a result, further economic development in this period promotes entrepreneurship. For these reasons, economic development influences the popularity of entrepreneurship.

2.3 Innovation and economic development
Innovation is the action of putting creative ideas into effect, which involves introducing creative ideas and unique way to implement. Drucker (1957) views innovation as the purposeful search for changes and the opportunities that such changes might offer. Similarly, Schumpeter (1934) presents that innovation is the engine of change in economy. Furthermore, he raises the issue of creative destruction as a tool of entrepreneurship that discrete innovation destroys traditional market and rapidly replaces less competitive economic activities development.

These suggest that innovation is the catalyst of economic development. For example, an iPod is derived from combing various technologies with unique design, which is an innovation in MP3 player industry. The production of an iPod included 41,000 jobs worldwide in 2006, creating job opportunities and boosting global trade (Linden, Kreamer and Dedrick, 2007). Furthermore, Boston Consulting Group (Collaborative Economics, 2008) also states that innovation is becoming an important economic motivator based on their research on the US Productivity Growth Outputs. For these reasons, innovation is the major force for economic development.

Nevertheless, the level economic development affects the function of innovation. According to the Artadi and Xavier (2004), the stage of economic development of a country covers factor-driven stage, efficiency-driven stage and innovation driven stage. Innovation plays different roles in different development phases. In factor-driven stage, the economy of a country is primarily driven by abundant and low-cost labor and natural resources. The contribution from innovation is negligible that is not worth considering in this period. Then, in efficiency-driven stage, countries seek to improve procession efficiency and promote productivity with existed technologies. In this phase, innovation is a secondary consideration.

Later, in innovation-driven stage, innovation is an essential element of economic development. Most sectors or industries are experiencing Schumpterian renaissance: innovation become the crucial engine boosting economic development. Furthermore, Romer’s endogenous model also documents the diverse innovation performance in different levels of economic development (Romer, 1990). For these reasons, economic development has crucial impacts on innovation’s function.

In summary, innovation is the pre-requisite for real entrepreneurship, which adapted by entrepreneurship to stimulate economic development. However, different level of economic development affects the popularity of entrepreneurship and the function of innovation. 3. The role of sustainability

Sustainability is the concept that “maintaining, or fostering the development of, the systematic contexts that produce the goods, services, and amenities that people need or value, at an acceptable cost, for as long as they are needed or valued” (Allen, Tainter and Hoekstra, 2003, P26).

According to the definition, the objective of sustainability is to maintain an environment that assures to sustain the development of human beings. This issue is becoming popular in recent years because of its positive effects on entrepreneurship, innovation and economic development.

It is widely accepted that generating competitive advantages is crucial for entrepreneurs that own growing firms (Penrose, 1959 cited in Kor and Mahoney, 2004). Hart (1995 cited in Paton, 2000) points out that the goal of sustainability is entirely consistent with the profit motive competitive advantages. In other words, sustainability, as the vital process of generating competitive advantages, plays a significant role in entrepreneurship. Taking social responsibility is an important aspect of sustainability and helps enterprises generate competitive advantages. NIKE is a suitable example of this. NIKE was accused of using child labour in production of its sneakers in Pakistan in 1996.

This unsustainable behaviour incurred criticisms from several society groups and damaged its brand image, resulted numerous people refused to purchase its products. In order to address this problem appropriately, NIKE formulated new policies and required its contractors must minimize potential negative environmental effects, offer a hygiene and comfortable work place and improve the health conditions of all employees (Wright, 2013). These measures reflect NIKE’s behaviour of social responsibility that meets the society’s expectation for sustainable behaviour, which maintain a superior brand image and strengthen competitive position. In this case, NIKE derives competitive advantages from its sustainable management. This indicates sustainability enhances the development of entrepreneurship.

It is mentioned in the Section 2 that entrepreneurship has positive effects on innovation and economic development. Kao (2010) states that entrepreneurship is a potential force for sustainability, which indicates it is likely that sustainability has important influence on innovation and economic development through enterprise performance. Haier’s success in Fluorine-Free Energy-Saving Air Conditioner is a suitable example of this. The process of producing new air conditioner is similar to Schumpeter’s creative destruction. Haier developed and combined new Fluorine-Free and Energy-saving technologies and built new venues in order to produce this product (Yao, Pan and Yuan, 2010).

In other words, it destroys the traditional Fluorine-added air conditioner industry and launched new air conditioners into the market. Through this case, the production of new air conditioner develops innovation and the new manufacture venues offer more job opportunities, which is beneficial to economic development. For these reasons, sustainability boosts innovation and economic development through enterprise performance.

4. Conclusion

In conclusion, the relationship between entrepreneurship, innovation and economic development is complex. This essay illustrates that innovation is the premise of entrepreneurship. This paper also illustrates that entrepreneurship plays an important role in economic development. It is because that large number of entrepreneurial activities can constantly allocate resources efficiently and acquire original goods. At the same time, the popularity of entrepreneurship varies during different level of economic development.

Similarly, innovation, serves as the engine of economic development, also behaves differently in different economic development phases. In addition, the role of sustainability in innovation, entrepreneurship and economic development is vital. That is sustainability helps entrepreneurship generate competitive advantages and promotes innovation and economic development. Furthermore, it is suggested that an entrepreneur should concentrate on innovation and perform sustainably in order to generate competitive advantages and boost economic development.

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The Relationship Between Entrepreneurship, Innovation and Economic Development. (2016, Jul 18). Retrieved from

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